Opinion
NOT FOR PUBLICATION
MEMORANDUM DECISION
PETER W. BOWIE, chief Judge, United States Bankruptcy Court.
This adversary proceeding came on for trial on plaintiff's complaint seeking a determination that Mr. Sanchez should be denied a discharge under 11 U.S.C. § 727(a), and that the debt allegedly owed to Mr. Hunt, specifically, should be determined to be nondischargeable under 11 U.S.C. § 523(a)(2) and (a)(4). The Court has subject matter jurisdiction over the proceeding pursuant to 28 U.S.C. § 1334 and General Order No. 312-D of the United States District Court for the Southern District of California. This is a core proceeding under 28 U.S.C. § 157(b)(2)(I), (J).
The Court begins with Mr. Hunt's causes of action for denial of a discharge under § 727 because if Mr. Hunt prevails on any-one of those claims, then any debt owed by Mr. Sanchez to Mr. Hunt is not discharged, and Mr. Hunt would be entitled to judgment, without further examination of his claims under § 523.
Mr. Hunt invokes three subparts of § 727(a) in objecting to a discharge for Mr. Sanchez. They are § 727(a)(2), (a)(4)(A), and (a) (5) . The Court has had occasion to consider^ the first two in some depth in In re Coombs, 193 B.R. 557 (Bankr. S.D. CA 1996). To review: Subsection(a)(2) of § 727 provides:
(a) the court shall grant the debtor a discharge unless -
(2) the debtor, with intent to hinder, delay, or defraud a creditor or an officer of the estate charged with custody of property under this title, has transferred, removed, destroyed, mutilated, or concealed, or has permitted to be transferred, removed, destroyed, mutilated, or concealed -
(A) property of the debtor, within one year before the date of the filing of the petition; or
(B) property of the estate, after the date of the filing of the petition
Subsection (a)(4)(A) of the § 727 states:
(a) The court shall grant the debtor a discharge unless-
(4) the debtor knowingly and fraudulently, in connection with the case-
(A) made a false oath or account ....
It is now generally recognized that a plaintiff must establish the allegations in an action under § 727(a) by a preponderance of the evidence. In re Cox, 41 F.3d 12 94, 12 97 (9 Cir. 1994). At the same time that courts utilize the preponderance standard for weighing the evidence in a § 72 7 action, they also reiterate that:
Cir. 1992), the Bailey court stated "'[d]ebtors have an absolute duty to report whatever interests they hold in property, even if they believe their assets are worthless or unavailable to the bankruptcy-estate.'" The Bailey court continued: "This is because '[t]he bankruptcy court, not the debtor, decides what property is exempt from the bankruptcy estate.'"
[O]bjections to discharge under 11 U.S.C. § 727 are to be literally and strictly construed against the creditor and liberally in favor of the debtor.
In re Bodenstein, 168 B.R. 23, 27 (Bankr. E.D.N.Y. 1994). In re Adeeb, 787 F.2d 1339 (9 Cir. 1986) discusses what, at least in part, that rule of construction means:
Cir. 1992); In re Davidson, 164 B.R. 782, 785 (Bankr. S.D. Fla. 1994), modified on other grounds, 178 B.R. 544 (Bankr. S.D. Fla. 1995); In re Schroff, 156 B.R. 250, 254-55 (Bankr. W.D. Mo. 1993); In re Smith, 161 B.R. 989, 991 (Bankr. E.D. Ark. 1993). Again, actual fraud is required. In re Devers, 759 F.2d 751, 753-54 (9
Accordingly, discharge of debts may be denied under section 727(a)(2)(A) only upon a finding of actual intent to hinder, delay, or defraud creditors. Constructive fraudulent intent cannot be the basis for denial of a discharge. (Citation omitted.) However, intent "may be established by circumstantial evidence, or by inferences drawn from a course of conduct." (Citation omitted.)
As to § 727(a)(4)(A), courts generally agree:
[T]he plaintiff must prove by a preponderance of evidence that: (1) debtors made a statement under oath; (2) the statement was false; (3) debtor knew the statement was false; (4) debtor made the statement with fraudulent intent; and (5) the statement related materially to the bankruptcy case.
In re Bailey, 147 B.R. 157, 162 (Bankr. N.D. 111. 1992) As one court put it:
The purpose of these requirements is to insure that those interested in the case, in particular the trustee, have accurate information upon which they can rely without having to dig out the true facts or conduct examinations. (Citations omitted.) A debtor has an uncompromising duty to disclose whatever ownership interest he holds in property. It is the debtor's role to simply consider the question carefully and answer it completely and accurately. (Citation omitted.) Even if the debtor thinks the assets are worthless he must nonetheless make full disclosure. (Citation omitted.) In completing the schedules it is not for the debtor to pick and choose [sic] which questions to answer and which not to. Indeed, the debtor has no discretion - the schedules are to be complete, thorough and accurate in order that creditors may judge for themselves the nature of the debtor's estate. (Citation omitted.)
In re Lunday, 100 B.R. 502, 508 (Bankr. D.N.D. 1989); In re Haverland, 150 B.R. 768, 770 (Bankr. S.D. Cal. 1993) .
Two of the indispensable elements of a cause of action under § 727(a)(4)(A) are fraudulent intent and materiality. It is generally recognized that:
A plaintiff can rarely produce direct evidence of fraudulent intent; the requisite actual intent to defraud may therefore be established through proof of sufficient "badges of fraud." (Citation omitted.) Such badges of fraud include reservation of rights in or the beneficial use of the transferred assets; inadequate consideration; close friendship or relation to the transferee; the financial condition of the transferor both before and after the transfer; and "'the existence of cumulative effect of a pattern or series of transactions or course of conduct after the incurring of debt, onset of financial difficulties, or pendency or threat of suits by creditors.'"
[W]here there has been a "pattern of falsity", or a "cumulative effect" of falsehoods, a court may find that [fraudulent] intent has been established.
Likewise, a court may infer fraudulent intent under Code § 727(a)(4)(A) from a debtor's reckless indifference to or cavalier disregard of the truth.
In re Maletta, 159 B.R. 108, 112 (Bankr. D. Conn. 1993); In re Gipe, 157 B.R. 171, 176-77 (Bankr. M.D. Fla. 1993) . However:
The denial of a discharge under 11 U.S.C. §. 727(a) (4) (A) cannot be imposed where the false statement was the result of a simple or honest mistake or inadvertence. (Citations omitted.) Rather, to sustain an objection to discharge under 11 U.S.C. § 727(a)(4)(A), the debtor must have willfully made a false statement with intent to defraud his creditors. (Citations omitted.)
In re Bodenstein, 168 B.R. 23, 32 (Bankr. E.D.N.Y. 1994). Similarly, "material misstatements, absent fraudulent intent, do not warrant denial of a discharge under § 727(a)(4)(A) . . .." In re Parsell, 172 B.R. 226, 231 (Bankr. N.D. 1994). It bears repeating that an essential element under § 727(a)(4)(A) is that debtor acted with an actual intent to defraud. To be sure, that intent may be proven by circumstantial evidence. In re Devers, 759 F.2d 751, 753-54 (9 Cir. 1985); In re Schroff, 156 B.R. 250, 254 (Bankr. W.D. Mo. 1993). And it may be inferred from all the surrounding circumstances. Ibid. But there must be specific facts or circumstances which point toward fraud. The court, in In re Smith, 161 B.R. 989, 991 (Bankr. E.D. Ark. 1993) observed:
Cir. 1985) .
First, the debtor's actual intent must be found as a matter of fact from the evidence presented. Of course, the objecting party must generally rely on a combination of circumstances which suggest that the debtor harbored the necessary intent. The Court may then draw an inference from this evidence. (Emphasis added.)
Some courts have stated: "The fact that numerous major assets were omitted will alone satisfy the requirement that such omissions be knowing and fraudulent."
In re Schroff, 156 B.R. 250, 256 (Bankr. W.D. Mo. 1993); In re Shah, 169 B.R. 17, 21 (Bankr. E.D.N.Y. 1994). More than one court has opined:
The Debtor's numerous omissions in his Statement of Financial Affairs and Schedules, taken together may constitute a pattern demonstrating a reckless disregard for the truth. (Citation omitted.) This reckless disregard for the truth is widely recognized as the equivalent to fraudulent intent. (Citation omitted.)
In re Metz, 150 B.R. 821, 824 (Bankr. M.D. Fla. 1993). Such conclusory statements are of little use to a court trying to determine whether the requisite fraudulent intent exists in a particular case. Competent facts placed in evidence must point toward that fraudulent intent. If no facts point toward fraudulent intent, it cannot be found simply by cumulating the number of omissions. Neither sloppiness nor an absence of effort by the debtor supports, by itself, an inference of fraud. Courts which hold otherwise are simply devising a court-made prophylactic rule that the debtor must make substantial effort to provide accurate and complete schedules. Had the Congress intended to make such a rule, it could have done so easily, as it did with § 727(a)(3) (failure to keep adequate books and records), and (a)(5) (failure to adequately explain the loss of assets), neither of which have an express element of fraudulent intent. In re Bodenstein, 168 B.R. 23, 33 (Bankr. E.D.N.Y. 1994) .
The essential point is that there must be something about the adduced facts and circumstances which suggest that the debtor intended to defraud creditors or the estate. For instance, multiple omissions of material assets or information may well support an inference of fraud if the nature of the assets or transactions suggests that the debtor was aware of them at the time of preparing the schedules and that there was something about the assets or transactions which, because of their size or nature, a debtor might want to conceal. For instance, in In re Chalik, 748 F.2d 616, 168-19 (11 Cir. 1984), the debtor failed to disclose dealings with twelve corporations of which he was the sole or controlling shareholder and which had $2.1 million in assets and $250,000 per month in income. The court in In re Aboukhater, 165 B.R. 904, 910 (9 Cir. BAP 1994) looked to the substantiality of the omission to support an inference of an intent to defraud. In other words, is there something about the omitted asset or transaction which a debtor might want to avoid disclosing. That is why the so-called badges of fraud are utilized to discern intent. In re Woodfield, 978 F.2d 516, 518 (9 Cir. 1992); In re Gipe, 157 B.R. 171, 176-77 (Bankr. M.D. Fla. 1993). Another court has called them "factors to consider". In re Schroff, 156 B.R. 250, 254-55 (Bankr. W.D. Mo. 1993).
Cir. 1991) . A false pretense involves an implied misrepresentation, or conduct which creates and fosters a false impression. A false representation is an express misrepresentation that induces conduct. In re Grant, 237 B.R. 97, 113 (Bankr. E.D. Va. 1999).
Cir. 1996).
Cir. 1986) is a seminal case in this Circuit, and held that applying California law in ascertaining whether the requisite trust relationship exists yielded the conclusion that partners are fiduciaries of each other. Particularly helpful in any § 523(a)(4) analysis is identification of an identifiable pre-existing trust res. As noted in Raqsdale, trusts arising ex maleficio or as a result of wrongdoing do not satisfy § 523(a)(4). "The trust giving rise to the fiduciary relationship must be imposed prior to any wrongdoing; the debtor must have been a 'trustee' before the wrong and without reference to it." 780 F.2d at 796. In In re Lewis, 97 F.3d 1182, 1185 (9
A number of courts have considered the concept of materiality. Most cited is In re Chalik, 748 F.2d 616, 618 (11 Cir. 1984). There, the court concluded:
Cir. 1996), the court reiterated:
The subject matter of a false oath is "material, " and thus sufficient to bar discharge, if it bears a relationship to the bankrupt's business transactions or estate, or concerns the discovery of assets, business dealings, or the existence and disposition of his property .... The recalcitrant debtor may not escape a section 727(a) (4) (A) denial of discharge by asserting that the admittedly omitted or falsely stated information concerned a worthless business relationship or holding; such a defense is specious. (Citation omitted.) It makes no difference that he does not intend to injure his creditors when he makes a false statement. Creditors are entitled to judge for themselves what will benefit, and what will prejudice, them. (Citations omitted.) The veracity of the bankrupt's statements is essential to the successful administration of the Bankruptcy Act. (Citation omitted.)
The court in In re Bailey, 147 B.R. 157, 162-63 (Bankr. N.D. 111. 1992), reiterated the foregoing, and added several observations. Quoting from Matter of Yonikus, 974 F.2d 901 (7
The Bailey court then wrote at length:
10. Debtors in Chapter 7 proceedings have an affirmative duty to disclose on their schedules of assets whatever ownership interest they hold in any property, inclusive of all legal and equitable interest in said property, as of the commencement of a bankruptcy case. (Citations omitted.) The purpose behind 11 U.S.C. § 727(a)(4) is to enforce debtors' duty of disclosure and to ensure that the debtor provides reliable information to those who have an interest in the administration of the estate. (Citations omitted.) "Bankruptcy Trustees lack the time and resources to play detective and uncover all the assets and transactions of their debtors." Since § 727(a)(4) relates to the discovery of assets and enforces debtors' duty of disclosure, an omission can be material, even if the creditors were not prejudiced by the false statement. (Citations omitted.)
11. Allowing debtors the discretion to not report exempt or worthless property usurps the role of the trustee, creditors, and the court by denying them the opportunity to review the factual and legal basis of debtors' claims. It also permits dishonest debtors to shield questionable claims concerning an asset's value and status as an exemption from scrutiny. Therefore, the mere fact that unreported property is thought to be worthless or exempt is not a per se defense in a § 727(a)(4) action to bar discharge.
12. However, while the assertion that property is worthless or exempt is not a per se defense, it is a factor in determining materiality, and several courts have found minor omissions from debtors' schedules of assets to be immaterial.
See In re Cross, 156 B.R. 884, 889 (Bankr. D.R.I. 1993); In re Give, 157 B.R. 171, 178 (Bankr. M.D. Fla. 1993); In re Haverland, 150 B.R. 768, 771-72 (Bankr. S.D. Cal. 1993).
Returning to the allegations under § 727(a)(2)(A), many of the elements are similar. Specifically:
To deny a discharge under this section, the court must find that the Debtors harbored actual intent to hinder, delay or defraud a creditor or officer of the estate. ... We may infer the intent from the circumstances surrounding the transaction.
In re Woodfield, 978 F.2d 516, 518 (9
Finally, § 727(a) (5) provides for denial of a Chapter 7 discharge where "the debtor has failed to explain satisfactorily, before determination of denial of discharge . . . any loss of assets or deficiency of assets to meet the debtor's liabilities . . .."
During the course of the trial, Mr. Hunt established that Mr. Sanchez did not list Mr. Hunt as a creditor, even though Mr. Hunt had sued him for partition of the property; ouster; an accounting; breach of contract; specific performance; and fraud and misrepresentation. He also established that Mr. Sanchez had failed to disclose the brief existence of two bank accounts at Washington Mutual. Both were opened on May 5, 2 008. The first was in Mr. Sanchez's name, only, and involved a deposit of $3,000. That account was closed on May 30, 2008 after withdrawal of all the funds. The second was an account in the joint names of Mr. Sanchez and Mr. Hunt, had an opening deposit of $2,000, and was also closed on May 30, 2008 following withdrawal of the funds.
Mr. Hunt also established that Mr. Sanchez did not disclose his prior ownership of a home in Las Cruces, New Mexico. There was no mention of it in his Statement of Financial Affairs. At trial, Mr. Sanchez testified his former wife had occupied it, had trashed it, then he rented it out ostensibly for the debt service on it; and finally, he sold it to the tenants for the debt on it. He testified he had to pay almost $10,000 out of his own pocket to close the escrow.
Further, Mr. Hunt established that in February and March 2009, Mr. Sanchez gave receipts to a tenant for rent payments for 3236 Menlo Avenue, which were not disclosed to the Court or the trustee in any of Mr. Sanchez's filings. The ostensible rent was $560 in March and $540 in February. Neither was paid in full, according to the receipts, and there is no evidence on whether there were any other months, or any other tenants also paying rent.
Lastly, Mr. Hunt asserted that Mr. Sanchez understated his income from both employment and from his Veteran's educational benefit.
As already noted, 11 U.S.C. § 727(a)(2)(A) requires proof of an actual intent to hinder, delay or defraud a creditor or officer of the estate. The Court finds and concludes that Mr. Hunt has failed to carry his burden of establishing the requisite intent. Accordingly, judgment should enter in favor of Mr. Sanchez on Mr. Hunt's claim for denial of discharge under 11 U.S.C. § 727(a)(2)(A).
Mr. Hunt also seeks denial of a discharge under 11 U.S.C. § 727(a)(5), for failure to satisfactorily explain a loss of assets. A premise of that argument is the amount of money Mr. Sanchez is supposed to have had at a certain time, based on Mr. Hunt's claims of payments to Mr. Sanchez. As discussed, infra, the Court finds that Mr. Hunt has failed to establish one of the supposed $10,000 payments, reducing the funds supposedly unaccounted for to a relatively small amount over a span of a number of months. The Court finds and concludes that Mr. Hunt has failed to carry his burden in establishing denial of a discharge under 11 U.S.C. § 727(a)(5).
The remaining claim of Mr. Hunt under 11 U.S.C. § 727 is under subpart (a)(4) for making a false oath. That oath is taken in signing the bankruptcy schedules and Statement of Financial Affairs under penalty of perjury, as well as the oath taken at the statutory meeting of creditors. As already discussed, Mr. Hunt has established several items that were omitted by-Mr. Sanchez in his bankruptcy filings. Moreover, Mr. Sanchez amended Schedules B and C to disclose, and claim as exempt, state and federal tax refunds. He did so within weeks of the bankruptcy filing. It was not until more than a year later that he amended his Statement of Financial Affairs to disclose the transfer of the New Mexico property, and the closing of the two Washington Mutual accounts. These amendments were filed long after this adversary proceeding was commenced. The Court is satisfied that the nondisclosures were "material", within the rubric of § 727(a)(4).
The challenge under § 727(a) (4) often is - as it is here -to ascertain whether the debtor had the requisite fraudulent intent. As noted, supra, to determine that, we are relegated to looking for "badges of fraud". As previously discussed:
Such badges of fraud include reservation of rights in or the beneficial use of the transferred assets; inadequate consideration; close friendship or relation to the transferee; the financial condition of the transfer on both before and after the transfer ....
In re Maletta. 159 B.R. 108, 112 (Bankr. D. Conn. 1993). Examining the evidence adduced at trial, the Court is unable to find sufficient "badges" to deny Mr. Sanchez a discharge under § 727(a)(4). At trial, he testified that he told his attorney about the New Mexico property, and reminded him of it when reviewing his petition before filing. His attorney repeated those assertions in the Defendant's Trial Brief filed in this matter before trial, and they have gone unchallenged. On the record before the Court, the Court is unable to find by a preponderance of evidence that Mr. Sanchez had the intent to defraud or deceive when he failed to disclose the New Mexico property transfer, or the Washington Mutual accounts.
For all the foregoing reasons, the Court finds and concludes that Mr. Hunt has failed to carry his burden of proving a violation of § 727(a)(4) sufficient to warrant a denial of discharge under that subpart.
Having determined there is no basis for denial of a discharge under 11 U.S.C. § 727, the Court turns to examination of whether any debt owed by Mr. Sanchez to Mr. Hunt survives a general discharge because it is nondischargeable under 11 U.S.C. § 523(a)(2)(A) or (a)(4).
Section 523(a)(2)(A) provides in relevant part that a discharge under section 727 "does not discharge an individual debtor from any debt - "
(2) for money, property, services . . . to the one extent obtained by -
(A) false pretenses, a false representation, or actual fraud
In the Ninth Circuit, a creditor must establish each of the following elements:
(1) That the debtor made the representations;
(2) That at the time they were made, debtor knew they were false;
(3) That they were made with the intention and purpose of deceiving the creditor;
(4) That the creditor justifiably relied on the representations; and
(5) That the creditor sustained the alleged loss and damage as the proximate result of the representations having been made.
In re Britton, 950 F.2d 602, 604 (9
It is established that when a debtor has a duty to disclose, silence, or omission of a material fact can constitute a false representation actionable under § 523(a)(2)(A). In re Apte, 96 F.3d 1319, 1323 (9
Section 523(a)(4) is more brief. It states that a "discharge under section 727 . . . does not discharge an individual debtor from any debt
(4) for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny . . .."
For purposes of § 523(a)(4), the meaning of "fiduciary" is an issue of federal law, and is not controlled by a label state law might apply. Ragsdale v. Haller, 780 F.2d 794 (9
[T]he fiduciary relationship must be one arising from an express or technical trust that was imposed before and without reference to the wrongdoing that caused the debt.
The case begins with an apparent friendship between Cory Hunt and Marcus Sanchez, which evolved over a number of years. They did small projects together for friends, attended concerts, went kayaking.
Mr. Sanchez became interested in buying a house that could be fixed up and would generate revenue. He found the subject property in foreclosure. It had two homes on it, and he entered escrow on it. He testified he was having difficulty qualifying for the necessary loan because of his debt-to-income ratio. He testified that was when he approached Mr. Hunt about possibly participating in the project. Mr. Hunt testified that when he was contacted by Mr. Sanchez he got the address, did some research, consulted a realtor and hired a contract inspector. He visited the property, and orally agreed to become partners with Mr. Sanchez. Subsequently, a handwritten agreement was drawn up and signed by both of them, but not dated. The document is Exhibit 3, and is captioned "50%//50% Partnership Agreement By and Between Marcos Sanchez and Cory Hunt on 3236 and 3238 Menlo Ave San Diego, CA 92105 (two separate houses on one lot, front house 3 br 1.5 ba + 2 car garage back house 3 br 1.5 ba on back of property)" The document states:
Cory and Marcos agree Marcos will complete started escrow and get loan for approx. $300,000 ($312k with 12k coming back from seller approx) and complete purchase Cory will assist with money to get this completed and in listing work and repairs that must be done.
Marcos and Cory agree to not put any other loans or allow any liens or encumberances on the property or to take on any other partners or investors.
Marcos and Cory agree not to do any work or have any work done over $100.00 with out writing a request and agreeing in writing to the type of work repair/or replace who's doing how long it will take will it affect the rental date etc and signing an agreement)
Marcos and Cory agree to meet soon after signing all loan docts and go over cost estimates and closing costs and Marcos will give copies of all documents to Cory.
Marcos will give Cory keys and access to property as soon as possible. Marcos will make a list of all work that has to be done in order to get houses rented. Cory will go over it and make a list that Marcos can review and Cory and Marcos will sign and then make a buget for supplies needed and both sign Cory and Marcos will set a schedule for work to be done and make a flow chart and time estimate of the work and sign and agree to complete on time or make a list of penalty or consequence and sign and agree.
Cory and Marcos agree to do all the work themselves to avoid any additional costs or exspenses the only exception being possible $200.00 for electrician or to get or meet city code requirements for anything additional we meet write up and sign an agreement between us and we get at least 3 written estimates first each to present each other.
If Cory or Marcos want to end change or disolve this partnership they must do so by writing the other and stating what the problems are and what they want to do to resolve them then Cory and Marcos will meet and try to resolve or fix these problems. Cory will have the option to buy the partner (Marco) out, at the purchase price plus work what work has been done or an agreed fair price. Marcos will have this option at this fair price also to buy out Cory if any partnership agreements cant be worked out.
In they event the property sells Marcos & Cory will split any profits 50/50 and we agree to give each other first right of purchase and work together to complete this.
Marcos will give copies of all papers escrow loan etc. to Cory as soon as he recieves them or any other notices city SDGE water etc.
Marcos will meet with Cory and they will set up a more defined/Partnership soon as possible after closing.
Cory & Marcos will meet and make a list of all work to be done and a time line schedule & cost for each item.
Marcos and Cory will set up a goods/supplies account for materials.
Both Mr. Hunt and Mr. Sanchez agree that on or about February 8, 2008 they entered into two loan agreements to deposit a total of $7,000 into Mr. Marcos' account as reserve funds to aid in closing the escrow on the Menlo Avenue property. Those funds were to be paid back to Mr. Hunt following the closing. Ultimately, those funds were not necessary to the closing, which Mr. Sanchez was able to accomplish without direct financial assistance from Mr. Hunt. Mr. Sanchez testified that he was able to improve his debt-income ratio by borrowing money through the same loan officer (who was a friend of his) to pay off the debt on his Jeep - a transaction which is troubling to the Court but not part of this proceeding.
According to plaintiff's trial brief, and not controverted by anyone, Mr. Sanchez received title to the property on April 8, 2008. Mr. Sanchez testified he moved onto the property immediately, and began working on the property nonstop. Apparently he had been laid off by his employer and had the time available. He said he repaired pipe, toilets, furnaces, tile. He also spackled and painted, and cleaned up the yard, putting most of the items on his credit cards. He said he worked 18-20 hours a day, 7 days a week for about 3 0 days, and slept at the property. Mr. Sanchez testified Mr. Hunt was not there, but began coming around, asserting he was a 50% owner of the property.
Mr. Hunt testified to a different version of events. He said that he put up money during the initial escrow for materials, inspection and services, and that he paid those funds directly to Mr. Sanchez in cash, so has no records or receipts. Mr. Hunt said he moved onto the property after Mr. Sanchez gave him a key, and he began work to clean up the property. His testimony was that Mr. Sanchez did one percent of the work, while Mr. Hunt did ninety-nine percent. He also claimed he spent $1,500 - $2,000 on materials in April, 2008.
Neither Mr. Hunt nor Mr. Sanchez testified about what soured their relationship so quickly. On May 1, 2008 Mr. Sanchez repaid the $7,000 loaned by Mr. Hunt to act as an escrow reserve, and Mr. Hunt signed a receipt for it. Then, on or about May 5, 2008, two new accounts were opened at Washington Mutual. One was in Mr. Sanchez' name, alone, and had an opening deposit of $3,000. The other was a joint account with both names, Hunt and Sanchez on it, with a $2,000 opening deposit.
On or about May 5, 2 0 08, both Hunt and Sanchez executed a form "Residential Lease Or Month-To-Month Rental Agreement." It identified Mr. Sanchez as the landlord, and Mr. Hunt as the tenant. The term commenced May 5 and was to terminate after the purchase was completed. It recited that the rent was $1,500 per month, payable on the first of the month to Mr. Sanchez. It referenced that there was to be a $1,000 security deposit, which was the account set up at WAMU on May 5. Paragraph 15 had interlineated "Marcos and Cory are already making repairs", while paragraph 19 had written in: "Cory and Marcos are already partners on property so Cory will take caxe of sign". Handwritten in as paragraph 32A was "Tenant to get own renter's insurance", followed by Mr. Sanchez's initials.
According to both Mr. Hunt and Mr. Sanchez, it was agreed between them that Mr. Hunt would buy the property from Mr. Sanchez. Mr. Sanchez provided an unsigned copy of purported escrow instructions (Exhibit E) from Simply Escrow, dated June 2, 2008. It recited that Mr. Hunt, as buyer, had deposited $2,000 with seller, Mr. Sanchez, outside of escrow. From that point, the respective stories diverge. Mr. Hunt testified that he met at Hazard with Mr. Sanchez and Ms. Capri Lutes, who was with the escrow company. He testified he paid over to Mr. Sanchez $10,000 in cash, on two different occasions, to be deposited in the escrow, approximately 25-30 days apart. He said when he learned neither payment was deposited in escrow he did not make any more payments.
Mr. Sanchez, on the other hand, testified he never received any $10,000 payments from Mr. Hunt, although the two of them did meet with Ms. Lutes on one occasion. When Mr. Hunt never completed the escrow, he gave instructions to Simply Escrow on or about October 21, 2008 to cancel it.
Reconciling the conflicting testimony of Mr. Hunt and Mr. Sanchez is difficult because no paper trail was presented by either. Mr. Hunt testified the payments were in cash, and that he kept his monies in cash, gold or silver, real estate. He did not recall where the money came from, "maybe something he sold." Curiously, he testified that when he paid the $10,000, he trusted Mr. Sanchez and considered him a good friend, even though their business relationship had collapsed and Mr. Hunt was going to take over the property.
As for Mr. Sanchez, he testified he thought Mr. Hunt was going to be on the loan on the property "50/50", and when he was not, he considered the so-called partnership agreement "null and void". Nevertheless, he agreed to sell the property to Mr. Hunt, although the terms were never clear, and an escrow apparently was opened for the transaction. Moreover, the so-called residential lease was executed, giving Mr. Hunt possession of the property. In a letter from one of Mr. Sanchez's attorneys, the attorney stated: "Mr. Hunt paid a non refundable deposit of $10,000.00 but never performed when the property was in escrow." (Ex. 8).
Further confusing matters are the repayment to Mr. Hunt of $7,000 on May 1, followed by Mr. Sanchez opening two new accounts on May 5, one in his own name, with $3,000, and one in both names, with a $2,000 deposit. The funds in both accounts were withdrawn on May 30, 2 008, and the accounts were closed. Mr. Hunt testified he never accessed the joint account, and could not access Mr. Sanchez's individual account.
From the evidence adduced at trial, the court finds and concludes that Mr. Hunt and Mr. Sanchez entered into a partnership somewhere around February 8, 2 008 to acquire the Menlo Avenue property. It appears the agreement contemplated that Mr. Sanchez would complete the escrow, while Mr. Hunt stood ready to help fund the closing. Thereafter, they were to improve the properties to make them rentable, and to thereafter share the profits, whether from rents earned or subsequent sale on an equal basis. Contrary Mr. Sanchez's testimony, the partnership was not "null and void" from the inception. To the contrary, it persisted, despite Mr. Sanchez's period of unemployment, for the short time between closing and the agreement to sell the property to Mr. Hunt. The Court finds that it is more probable than not that Mr. Hunt made a $2,000 payment outside of escrow, and one payment of $10,000. The evidence is insufficient to persuade the Court that a second $10,000 payment was made. In Ex. 8, the $10,000 is referred to as a "non refundable deposit", but no documentation or testimony was proffered to support the assertion that it was nonrefundable, much less what any other terms of the proposed sale were.
Based on the foregoing, the Court finds and concludes that Mr. Hunt has met his burden of establishing that Mr. Sanchez, while in a fiduciary relationship with Mr. Hunt as partners, accepted a specified res, $12,000, which he held as part of an escrow for sale of the Menlo Avenue property. He did not deposit any of the funds with the escrow company, and he did not return them to Mr. Hunt when Mr. Sanchez cancelled the escrow. Mr. Sanchez has failed to provide any competent evidence of authority to personally retain any of those funds upon the failure of the escrow. Accordingly, Mr. Hunt is entitled to a judgment that a debt of $12,000 owed to him by Mr. Sanchez is nondischargeable under 11 U.S.C. § 523(a)(4), and to a judgment in that amount.
In addition, the evidence established that on May 5, 2008 an account was opened at Washington Mutual in the names of both Mr. Sanchez and Mr. Hunt, with a deposit of $2,000. On or about May 30, 2008 Mr. Sanchez apparently withdrew the $2,000 and closed the account. Absent evidence to the contrary, Mr. Hunt had a right to one-half those funds. There is no evidence he ever accessed that account. Accordingly, Mr. Hunt is also entitled to a judgment of nondischargeability under 11 U.S.C. § 523(a)(4), and an award of $1,000.
Mr. Hunt has also asserted that the debt owed to him is nondischargeable under 11 U.S.C. § 523(a)(2)(A). However, Mr. Hunt has failed to meet his burden of establishing that Mr. Sanchez made knowingly false representations to Mr. Hunt that induced Mr. Hunt to part with any of the $12,000 at the time he made "the payments. Moreover, the Court is persuaded it would not be justifiable for Mr. Hunt to- pay over $10,000 without some receipt or requiring deposit in the escrow, given the decline in their relationship. Accordingly, judgment should enter in favor of Mr. Sanchez on Mr. Hunt's claim of nondischargeability under § 523(a)(2)(A).
Conclusion
Based on the foregoing analysis, the Court finds and concludes that judgment should enter in favor of Mr. Hunt, in the amount of $13,000, which judgment is nondischargeable under 11 U.S.C. § 523(a)(4) only. Judgment shall enter in favor of Mr. Sanchez and against Mr. Hunt on all other causes of action.
Counsel for Mr. Hunt shall prepare and lodge a separate form of judgment consistent with the foregoing within twenty-eight (28) days of the date of entry of this Memorandum Decision.
IT IS SO ORDERED.